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Blog : The Half Down Concept in Penny Stocks
October 21st, 2009
If you've ever been on the losing side of a penny stock trade, especially if you held on hoping those shares would go back to where you bought them, then you've been introduced to what I call the "Half Down" principle.
Quick question: If your shares drop half in value, how much do they have to go back up to reach breakeven?
Guess what, it's not 50%. It's 100%.
Picture a penny stock that falls from $2.00 to $1.00. It has fallen 50% in value. Now it's at $1.00, so how much does it need to rise to return to $2.00? It needs to increase in value by $1.00, so it would require an increase of 100% from the current price.
This unfortunate law of mathematics really puts investing in perspective. Even a 20% drop will need a 25% increase to get back to the start. A 90% drop needs a 900% gain to get back to where it began. Perhaps this is why penny stock investing can sometimes feel like you're swimming upstream - any loses you take will need to be overshadowed by any subsequent gains.
This is the unfortunate and unavoidable truth of the Half Down principle. Make sure to cut your losses in penny stocks early, and use Leeds Analysis to buy into high quality penny stocks with great upside potential that are less likely to introduce you to the dreaded Half Down concept.